DeFi Trading

Trade Token Pairs on DEXes

Leveraged trading, or margin trading is the activity of holding a long/short position on an asset, whilst increasing exposure to its price, by using funds borrowed from the broker as collateral. In DeFi, the role of the broker is performed by autonomous market makers (AMMs) such as those in liquidity pools. This type of trading can be undertaken on various decentralized exchanges (DEX’s). The borrowing component of leverage trading is facilitated by lending platforms like Aave and Compound.

DeFi trading occurs in a trust-minimized setting. In other words, at the core of DeFi is the attempt to remove centralized 3rd parties and supplant them with smart-contract-based peer-to-peer markets. These markets are governed by open-source protocols that have implemented smart-contracts and automation in place of 3rd parties that might otherwise have an unfair advantage in the market.

It is very simple to start trading on DEX’s. Simply open an account on any exchange, connect your crypto wallet on MetaMask or other Web 3.0 platforms, and trade. Some DEXs allow up to 10x leverage trading on ETH perpetual futures using ETH as collateral. This can generate large opportunities for profit, provided risk management is undertaken correctly.

Traders should be aware of the mechanism that facilitates trading at any particular DEX. Order books and AMM’s are two primary DEX mechanisms used to match buyers and sellers. As explained in other sections, each of these methods have pros and cons associated with their design.

Since the funds used in leverage trading are primarily borrowed, DeFi traders are more exposed to price volatility. Fluctuations caused by price volatility increase the risk of liquidation. This means a trading strategy can lose 100% of its value. With effective risk management, the damages of leveraged losses can be limited, for example by using stop losses to close the position at a certain point. It is also important to understand the AMM and how it relates to liquidity. An exchange with inadequate liquidity will result in low trading volumes. This subjects a DeFi trader to greater price volatility as well.

Video by: Finematics

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Eyal Herzog, CEO of Bancor
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“We released [Bancor] in 2017 … with the intention to help with price discovery… the bigger picture being the ability to swap one asset for another with no counterparty”

-Eyal Herzog
Source: Outlier Ventures: Founders of Web3

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